CORN – Low Risk Trade?
Grain markets are coming into the most volatile and trending part of the year as the first crop ratings on the American growing season appear. Fundamentally Soybeans and Corn have contrasting fortunes as ending stock projections diverge between to the two. Whilst adverse weather through the summer would undoubtedly provide bullish fuel to both, it is Corn that is has the most favorable set-up on both a fundamental and technical basis. Whilst the entire bean complex has broken its final support points in the past two weeks, corn has been trapped in one of its tightest ranges in decades.
Analysis of the the last 10- years December Corn contract shows that lowest range for the contract is a Dollar, and with nearly half the year gone the current range is only 25 cents. It would be highly unusual if that range was not to be expanded. With prices historically depressed Funds and Manged Money have one of there largest ever short positions. Against this, Unreported positions have there biggest long. Whilst it is unwise to to use these tools to project price action, what should be remembered is often the limits of participation change, so shorts can get bigger, as can longs. What is clear is a technical breakout higher would lead to fund short covering with there hand forced if price stayed above the 200 day moving average. Further upward momentum would come if Funds then got long.
Thus far Corn has been subject to planting delays and replants which will see acreage fall for it and rise for Beans, but modern technology means that it easy for these delays to be recovered. What cannot be escaped is the fact that these late plantings will mature in what is potentially a hotter part of the summer, with two of the largest producing States among the highest affected.
Corn Techncial Outlook
From a Technical prospective this period of sideways betrays the increasing bullish nature that is appearing. A glance at major market used Moving Averages (50,100,200) shows that they are at there most condensed value in many years.
Congestion Count has two guises which measures either the current bars number of bars that are touching the range of previous consecutive bars or as the chart is measuring below, the number of consecutive bars that are touching each other on a consecutive basis. It is currently at 13 weeks running which is the highest for over 30 years.
Time Area measures momentum from a month up to an annual basis and creates a stepping process of support and resistance and trend. Currently all values are below current price with the semi annual and annual points together at 364.50 which is both powerful support and close. More significantly the monthly blue line has risen for the first time in this crop cycle which highlights a shift in momentum upwards.
Peak Energy and Expansion measure what swing points are significant on a daily basis (red and pink), weekly (Black) and monthly (blue). The latter two are the most important and show there is a major monthly level at 384.50. Closes over this point would signal a breakout higher and open up 405.75, 440.5 and 472.5. This last level if reached would still only represent a 75 cent range on the year.
Whilst the technical picture still needs to confirm any bullishness there are ways to get involved before then via a variety of methods. Buying futures is the most risky as any close below 364 would force liquidation. Buying December options on futures is also possible but whilst volatility and premiums are low, they still represent a fair outlay with a December 400 call costing over $1000 per contract.
However there is an ETF that tracks Corn called CORN. The chart shows the correlation between that and the price of corn. Buying the ETF allows for a smaller position but again stops would have to be in place. Fortunately there Options on the ETF. The November 20 call will take you through the whole crop cycle and with the price currently at 19 is just out of the money. The price is 85 cents which means that premiums would cost just $85 per contract which gives exposure to 100 shares.
In the recent past when corn has reached 4.75 the ETF has reached 23.60, 26.20 and 27.70. It’s impossible to know exactly what future performance would be, but for risk of 85 cents logic suggests a move to at least 22.50 in the ETF which represents a 3 to 1 risk reward ratio. It’s a risk that Trading Safely is prepared to take.
Please note this is general advice from Trading Safely for all our clients and has been prepared without taking into account your personal objectives, financial situation or needs. If you do wish to consider acting on our information please contact a licensed financial advisor to discuss the appropriateness of this recommendation for your own personal financial circumstances. Please obtain any relevant product disclosure documents before deciding to invest. Trading derivatives, stocks and CFDs can lead to losses greater than your deposit.